Fallout: The Financial Crisis

Tough times for securitization industry

Bob Moon Feb 9, 2009
Fallout: The Financial Crisis

Tough times for securitization industry

Bob Moon Feb 9, 2009


KAI RYSSDAL: In Las Vegas this week you could go see a Cirque du Soleil show, catch Donnie and Marie Osmond at the Flamingo. Or you could do something really fun and hang around with a couple of thousand securities dealers. Alright, I kid. But until lately bankers and bond traders were about the only ones who paid much attention to securitization. But securitizing debt, that is, wrapping a whole bunch of things like mortgages together and selling them off as bonds, is a key part of the credit markets. And those credit markets still have some serious problems.

Our Senior Business Correspondent Bob Moon is covering the industry’s conference this week in Las Vegas. Hi, Bob.

BOB MOON: Hey, Kai.

RYSSDAL: A quick primer, I think, would be appropriate here on what securitization is and why it matters and how we use it.

MOON: Well, why it matters: This kind of securitized lending accounted for more than half of the credit available to consumers and businesses here in the U.S. before the meltdown. Now it’s literally fallen off a cliff, actually fell to within a hair’s breadth of zero. And although there’s some lending going on, there’s really very little of this kind of private investor lending.

RYSSDAL: It is, just as a refresher, the repackaging of mortgages, the repackaging of debt and selling it off into the marketplace, right?

MOON: Yeah, very often when you got a loan at the bank to buy a house or a car or send the kids to college — and even to borrow money on your credit card — the lender would turn around and package your loan with others, sell it to investors in what is known as a security. The buyer of that bond would make a steady return on their investment. And the bank would turn that money around right away into more loans.

RYSSDAL: We have said on this program, Bob — and you’ve certainly reported some of these stories — that securitization is almost dead. Some saying, also, that it can’t ever come back to the levels it was at previously. What are they saying — the folks who make their living doing this — out of that conference?

MOON: Well, I’ll tell you this. There are a lot of somber faces around here. And they know that they urgently have to try to turn this around. Just to give you an idea of what’s happened to these folks. Last year, around 6,000 people attended this conference. This year the number is a little more than half that. And that reflects not only that they’re not doing a lot of deals, but a lot of people have been laid off. So they know thay have to try to regain the trust of their investors.

The executive director of the American Securitization Forum, George Miller, told the group this morning he doesn’t buy those dire predictions about its complete demise.

GEORGE MILLER: Although some have identified securitization as a source of some of the problems we face in the financial markets, it is actually very much a part of the solution. In order to meet demand for credit and capital by consumers and businesses, the securitization markets need to work.

RYSSDAL: Obviously, they need to work, Bob. But let me pick up on the first part of what Mr. Miller said there. That some have blamed the complexity of these instruments for some of the problems. I mean, we had asset-backed securites and auction-rate securites, I mean we had all this stuff that was incredibly complicated. How do you restore investor faith in what is admittedly a very important part of the economy?

MOON: Well, they’re promising straight talk, for one thing. There’s agreement here that things did get so confusing, you almost needed to be a rocket scientist to figure out what you were investing in. Well, the chairman of this organization, Ralph Dalosio, suggested today they don’t need to come up with such fancy credit solutions. They’ve got more proven, basic approaches.

RALPH DALOSIO: If our message walks like a duck, quacks like a duck, and acts like a duck, there’s little point in boxing with a label that says, “Danger: Exotic wildlife enclosed.”

RYSSDAL: All right, I’m not really sure what he means, Bob. Is he trying to say that we can simplify the securities market and thus, from now on, not get so wrapped up in some of these problems we have?

MOON: Well, that’s what he was suggesting. He was saying, Let’s not slice and dice these into so many different forms that are hard to decipher, but let’s be very straightforward with our investors and help them understand exactly what they’re investing in. No need to complicate matters.

RYSSDAL: Do they know, the people you talk to in this industry, that part of the problem we’re in is because of the way they did their business?

MOON: Yes, they’re very much aware of that and there was a lot of talk today about ending the rocket science, if you will.

RYSSDAL: Lovely. Rocket science in high finance. Marketplace’s Bob Moon in Las Vegas at the American Securitization Forum. Thank you, Bob.

MOON: Thanks, Kai.

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